A trader explains the morning gap down setup: short when the market opens lower, rallies weakly on low volume, then stalls. Risk management matters most, so only trade if you can handle the loss and the potential reward justifies it.
Going back to a morning top setup for this, I'm looking for a gap down. What does this mean? That the market opens lower than yesterday's close. For example, if let's say yesterday market closed at 4000, at 4pm today at 9:30am it opens up at, I don't know, 39, 82nd. Is this usually within the first hour max? Maybe let's say five minutes to an hour second is. What is my entry criteria? What do I need to see? I'm looking for a move on the upside and I'm looking typically no follow through. This concept of no follow through essentially means we'll see a move that goes up. The volume isn't necessarily strong. You're not seeing a surge in volume, you're not seeing a surge in activity. My second entry criteria is once there's no follow through, do we start seeing the action slow down? Do we start seeing a little bit selling pressure? So two things that I've seen is I'll see selling pressure kick in or I'll see activity slow down. For me, that's where I start looking for the short. My risk has to make sense. Am I positioned accordingly, that if I'm wrong, I'm comfortable in what I lose? If I'm right, is there money for me to be made? If that makes sense, I'm good to go.
